Newport firm building ‘natural gas highway'

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On the third floor of a sleek Newport Beach high-rise, Andrew J. Littlefair can hardly contain his excitement. Tall and broad-shouldered, with a shock of red hair, the 52-year-old president and CEO of Clean Energy Fuels charges into his operations room to show off a wall of brightly lit screens.

“They map all our stations – more than 400 coast to coast,” he says. “We can see any malfunction and dispatch technicians. We can tell if a storm is coming and get generators in place.”

Around the corner, he points to a cabinet full of blueprints – the natural gas stations that the company has built from Seal Beach to Staten Island. “We've spent $300 million over two years on infrastructure,” Littlefair says.

The Torrance native and USC graduate spent a decade in Texas as right-hand man to billionaire oilman T. Boone Pickens. Sixteen years ago, with Pickens' backing, he moved back to California to launch a new company, Clean Energy Fuels Corp.

Today, the firm is North America's biggest provider of natural gas transportation fuel, with 1,000 employees across the United States and Canada, including 200 at its Orange County headquarters. Since going public in 2007, the company's market value has risen to more than $1 billion.

Filling tanks may not sound glamorous. But Clean Energy is on the leading edge of what many industry experts see as a revolution in transportation, with broad implications for the nation's environment and its national security.

The firm has yet to turn a profit. But Littlefair and Pickens, who holds a fifth of the company's stock, are betting that a significant share of the nation's buses and trucks will switch from diesel to natural gas in the next five years.

“We are at the tipping point of a huge market,” Littlefair says. “We're not dinking around competing in some little niche.”

An American fuel

Diesel, which powers most buses, trucks, trains and coastal-area boats today, is among the dirtiest of fuels. It is a major factor in the air pollution plaguing cities, transportation corridors and ports such as Long Beach and Los Angeles.

Moreover, like gasoline, diesel is made from oil, much of which is imported from the Middle East, where the U.S. military must spend billions of dollars to ensure its supply.

Natural gas is domestically produced, and, by most measures, cleaner than diesel. Due to a recent boom in hydraulic fracturing – a technique that forces fuel from deep rock formations – supplies have skyrocketed and the price has plummeted.

“A large-scale transition to natural gas from diesel fuel is happening in the $134 billion fleet fueling market,” Robert D. Brown, an analyst with Minneapolis-based Lake Street Capital Markets, concluded in a recent report. “Clean Energy Fuels sits squarely in front of this mega-trend with a dominant leading position … and we expect a long tail of growth for the company.”

The firm got its start from government incentives and tightened regulations that spurred garbage trucks and city buses to clean up tailpipe emissions. It sold compressed natural gas, or CNG, for Los Angeles buses, one of the nation's first transit systems to switch from diesel.

In Orange County, 90 percent of garbage trucks and 70 percent of public buses, along with airport shuttles and taxis, run on natural gas.

Long-haul trucks, the 18-wheelers on the nation's highways, pose a far bigger market challenge – one that requires liquefied natural gas, or LNG, a denser fuel than compressed natural gas, and suitable for greater distances.

So Clean Energy has begun to add liquefied natural gas dispensers to what it calls “America's Natural Gas Highway,” its coast-to-coast network of stations. Several already operate at Los Angeles and Long Beach ports, and among the warehouses of the Inland Empire.

The firm owns LNG plants in California and Texas, and plans a third in Florida, which would also serve cargo ships.

Earlier this year, a powerful rival entered the market. Shell announced it will build 100 liquefied natural gas lanes at truck stops, beginning in 2014.

Shell also is investing in plants in the Great Lakes and Gulf Coast regions to serve both vessels and vehicles. The strategy has risks. Today, diesel costs about $1.50 more per gallon than its natural gas equivalent – a difference that offsets the higher price of natural gas trucks. But if the price of oil drops and the price of natural gas rises, the incentive to switch could fade.

In addition, advances in electric vehicles or in hydrogen, biodiesel and ethanol technology could make those alternatives more competitive. In the passenger car market, electric power trains have a head start over natural gas, though Honda's CNG-powered Civic offers similar advantages.

The market expands

Nonetheless, in a recent speech to Cleantech OC, a local trade group, Littlefair
exuded optimism
as he clicked through a PowerPoint presentation.

“There are 3.2 million heavy-duty trucks in the U.S. today. They use 25 billion gallons of diesel a day,” he said. “Only 8,000 use natural gas. If they all went to natural gas, we could cut OPEC out.”

Last year, Clean Energy lost $101 million due to heavy spending on building stations – but it was necessary to overcome a “classic chicken and egg” scenario, Littlefair said.

Now, with dispensers multiplying, companies such as Cummins-Westport Inc. and Volvo AB have begun to manufacture natural gas engines. Truckmakers such as Kenworth and Navistar are selling vehicles designed to run on liquefied natural gas.

Meanwhile, railways such as BSNF are pressuring locomotive manufacturers to sell natural gas models, for fear of losing out to truckers if trains stick to pricier diesel.

Littlefair said he expects Clean Energy to turn a profit by 2016. This year, second quarter revenue was $88.1 million, up 26 percent from the same quarter last year. In 2012, company directors awarded him $1.8 million in salary, cash bonus and options, along with another $5.5 million in stock, tied to company performance.

Clean Energy has deployed 37 salesmen to lobby retailers and packaged goods companies to switch to natural gas. “Our sales pitch to shippers like Whirlpool is, ‘You all have sustainability goals. There's probably nothing better you can do for the environment – and you can save money, too,' ” Littlefair said.

UPS is adding 700 tractors to its LNG fleet of 112 by the end of 2014, citing cost savings and a U.S. Energy Administration estimate that the new vehicles will cut climate-warming carbon dioxide emissions.

Methane emissions

Environmentalists, however, dispute the ecobenefits. After decades of supporting compressed natural gas as cleaner than diesel, the Sierra Club, the Environmental Defense Fund and other groups now say that the explosive growth of hydraulic fracturing, or fracking, is a threat to the global climate, as well as causing local air and water pollution.

“Switching trucks from diesel to natural gas is like switching from cigarettes to chewing tobacco,” said Gina Coplon-Newfield, director of the Sierra Club's Future Fleet & Electric Vehicles Initiative. A recent study shows high levels of methane, a potent greenhouse gas, leaking from natural gas drilling, processing and fueling, she noted.

Instead, she suggested, transit systems should buy new cleaner-burning diesel or electric buses, and truckers should invest in aerodynamics, regenerative braking, high-tech tires and other strategies until hybrid and electric engines become available.

Regardless of the environmental debate, Clean Energy Fuels is counting on economics to drive its success. In 2008, the company had backed an unsuccessful statewide bond measure to subsidize natural gas trucks, but today, Littlefair
said, “We don't need it.”

Last month, the firm overcame another significant hurdle. It announced a deal with GE Capital offering natural gas truck leases for the same price as diesel leases, if a shipper signs a fuel contract.

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